U.S. mortgage interest rates jump to 6.52%, highest since mid-2008
reuters.com
reuters.com
Yes rates were 16% in 1980 but the median home was $64,000. That's $230,000 in today's dollars.
If you'd prefer to pick a time when rates were more comparable, how about 2001 at 7%. The median home price was $180,000. $301,000 in today's dollars.
Today's median home is selling for $440,000. It's small wonder that people are upset.
[1]: https://fred.stlouisfed.org/series/MORTGAGE30US [2]: https://fred.stlouisfed.org/series/MSPUS
(of course, in practice, once they've bought, people tend to be averse to their "investment" losing 20% or 30%, even if they did lock in a good interest rate they'll be paying for years to make up the fall. this has always been one of the giant gotchas with keeping interest rates so eternally low... also the cost of financing the national debt just zoomed up too.)
$1,996 / month in 2001 vs $2,972 / month in 2022
That's in today's dollars, accounting for inflation. Almost 50% more. Feel free to point out an error in my math.
This is not entirely irrational. The median length of hone ownership is about 13 years. With stable value and interest rates, this is not a big issue. People can role their equity into their next home and just pay the transaction cost of selling. With rising rates and falling prices, you would also need to realize the loss, and give up on the counteracting benefit of a low rate.
The net effect of this is to make people more reluctant to move than they otherwise would be.
Running the examples from before:
1980: 63 (actually for 1987, earliest in the chart)
2001: 110
2022: 305
I'm no economist so I won't try to interpret these numbers, but if higher is worse then it supports my original point.
Everyone better buckle up.
a $1M house or condo bought at 3% rates would have been under $5k all in a month. I’m fairly certain a single person with mid six figure income could easily afford that. It’s now around $6k which should also be doable.
Not for long.
For a US$1M house, which is the going rate near my area, the jump from 6% to 7% is $5000/month apr interest to $5834/month apr (not including fees, taxes, and insurance).
So to go back to the monthly of $5000 (which is out of my budget), a US$1M house would need to fall to $857,153. That is NOT happening around here.
I have no idea who is buying houses at these prices, if it's not BlackRock-type firms (corrected company name, thank you). I can't fathom how new homeowners are fairing in this market.
Only the most richest parts of the US have homes that start at $1m. And only a fraction of the people rich enough to live there can afford to purchase.
It is the only way to go for attaining (or worse, preserving) middle-class status.
https://www.blackrock.com/us/individual/insights/buying-hous...
Edited to change “ownership” to “purchasing”
US housing at 2% 15-year fixed is the biggest handout the world has ever seen. That's why Blackrock-type firms GOBBLED up real estate.
They were the first ones to back out when interest rates started going up.
They're not the ones buying.
I'm guessing the people who are buying are either 1) completely desperate, 2) oblivious, or 3) are willing to bet they'll have a chance to refinance at a much lower rate within a year or two and don't mind the extra carry-cost until then.
Those companies issue corporate debt (bonds) to buy houses.
The yield they need to offer goes down when the Fed manipulates bond prices by gobbling up non-corporate debt (US Treasuries & MBS).
BlackRock & other firms aren't taking on debt to invest in REITs - they're just directing more of their portofolio to REITs when The Fed drives down yields.
Important technicality - Blackrock and other large institutions don't buy SFH directly. They do it indirectly through other funds, like REITs.
1) You lock your mortgage rate for 90 days, so 90 days ago rates were significantly lower. These will be rolling off soon and by early next year the prevailing rates will obviously be much higher.
2) People are paying points up front to buy down the interest rate.
3) Jumbo mortgages are still much cheaper than conforming (I think a full point).
4) Lots of people buying with all-cash or mostly-cash. You're not at all rate-sensitive if you're a cash buyer.
5) A lot of these cash-heavy buyers are powered by generational wealth.
6) The housing shortage in the US is incredibly acute, so much so that the market will continue chugging along even as borrowing conditions worsen considerably. I bought a couple of years ago when the market was red-hot largely because a family-sized property was unrentable - to get anything big enough for my needs there was no choice but to buy. I imagine others are in the same position now.
I've also known people who have enough familial wealth that they just don't care.
Yes, it's perfectly sensible to use the bank's money when it's a fairly sure bet and the interest rate is low... but there is a big complexity cliff that exists between "used 0.1% of the bank's money" and "used 0% of the bank's money". Using 0% of the bank's money is preferable when closing the deal at least.
If you are in a position to make an all-cash offer but you want financing, you could probably buy the property in cash and then get a mortgage after. That's not the usual workflow for homebuyers but I don't see why you couldn't do it, it's just like refinancing really.
I don't know about you but in my generational cohort the people buying entirely on their own earning power is a small minority. The bulk of buyers are only able to enter the market due to generational wealth - and that comes in the form of cash.
So yeah, agreed in principle that if you had $X in cash lying around it'd be a poor choice to put it all on a piece of real estate. But in this case the $X in cash doesn't belong to you.
The whole state of the housing market is beyond alarming - not only are things completely unaffordable to wage earners, the people who are able to survive in this market are overwhelmingly doing so via familial and generational wealth. This is a flywheel of wealth inequality that is accelerating by the day - the well-asseted use their wealth to catapult their offspring into more assets that largely wage-earning classes (even very well-paid wage earners) are completely cut out of.
Institutional (or rich) buyers have the option of buying the house in cash, then taking out a loan against the house. This gives them the benefit of being able to make an all cash offer, and the long term benefit of leveraged, low interest debt.
Once done, it gets easier.
Of course, that is easier said than done, but it took me 10 years to save up for that first-time 20% down payment.
I too was a 90% percentile. And it also … afterward … took several homes upward before I can tap out for a bigger down payment for a 3,200 sq. ft. in “cushy” California while attaining just 25% of take-home pay toward mortgage+insurance.
First home was a killer 48% of take-home pay toward house payment.
That's a $3500 monthly housing payment with taxes, PMI, insurance, and 5% down.
I bring home $7k net/month. So that would be a 50% monthly housing payment for a 90th percentile income to purchase a median priced home. And that's even if I had the $30-40k cash in the first place to close on the loan, which is impossible to save due to rent, healthcare, transportation, and food costs going through the roof.
I seriously have no idea how people are even surviving on 50/60/70k salaries at this point.
The number of people in economic distress being forced to sell their houses will be rising over the next 12 months.
My dad gave me these rules for home buying:
* can I make the monthly payment for as long as I own the home?
* don't buy unless you expect not to sell for 5 years
* put down at least 10%
* don't get an ARM
People with adjustable rates haven't been adjusted yet. People that locked in rates at the lows are just fine. Only some small percent of people with mortgages would be affected right now, and optimistic people that think they can pay the rates have a few months before they realize their budget didn't fit. The cash buyers have slowed down. Just not a flood of foreclosures yet.
https://www.bankrate.com/mortgages/mortgage-rates/
Zillow is saying 6.54% (actually down 6 basis points, though still up 39bps from last week). Zillow does break things down into categories more with Jumbo loans having a lower than average rate at 6.36% while FHA loans are at 7.05%.
https://www.zillow.com/mortgage-rates/
It's hard to estimate what the average loan rate is (or really anything in the real world where you don't have complete data). What's the average price of a gallon of milk in your city? I mean, it sounds like a simple question, but quickly becomes complicated. There are 5 supermarkets in my city. Do I just look at the price at each of them and take the mean? Do I weight the prices based on which supermarkets are more popular? Do I only take the lowest price of a gallon of milk at the supermarket or do I average in the prices of brand-name and specialty milk? Should I also include milk prices from bodegas in my average? Should I include the milk price from Instacart where they're adding their own markup?
With the average mortgage rates, is this the average rate for mortgages with zero points or the average rate that buyers are getting with some deciding to pay points? For those who don't know what points are: you sometimes have the option to pay an upfront fee for a lower rate. Each point is 1% of the loan value. If your loan is for $1M and you pay 2 points, you're paying $20,000 upfront to get a lower rate.
For example, when I look at mortgage rates on BofA's website (https://www.bankofamerica.com/mortgage/mortgage-rates/) for a $500k home with 20% down ($400k loan), they pop up 6.625% (6.787% APR) with 0.865 points which would be an upfront cost of $3,460. Their calculator doesn't say how much the rate would be worse without points, but maybe they do if you're actually applying for a loan (or maybe they don't give you a choice).
Beyond points, there's so much difficulty in knowing what average rates are. Do you look at each lender and just average the rates or do you weigh rates from BofA higher because they're writing a lot more loans than smaller lenders? Do you even really know?
Also, since you posted (and since I started writing this comment), Mortgage News Daily has adjusted their estimate down to 6.82%.
I think one thing we can certainly say is that mortgage rates have been pushed quite high and the average is likely in the 6.5%-7% range at the moment. Yes, that is a reasonably broad range, but it's certainly a contrast from the sub-4% and even sub-3% rates we had seen.
https://github.com/whyboris/mortgage-and-investments
Hope it's useful to at least someone :)
I'm not sure I could have done the same using Excel, and software doesn't seem to exist to make these calculations easy to understand.
That's to say: Thanks! We need this.
Jerome Powell has indicated he wants to see the housing market correct. Unfortunately, real estate agents and sellers are slow to react. You don't just immediately drop your price to match the payment.
In Bay Area, houses effectively dropped from 2 => 1.85. They should drop 150K; but with the latest interest rate hike of 5.2->6.2 you'll see 50K price drops as buyers/sellers adjust. In reality, prices are still dropping as we bounce off the unreasonably low interest rate of 2-3%.
The interest rate will act as a gravity on prices, but housing prices won't immediately "snap" to the new normal. You'll see house prices begin to crash in a few months as a lagging effect.
On top of this, you'll see new home builds get put on hold, because the builders specifically won't be able to find people to buy a new house for a high price; their margins will be squeezed. With existing homeowners, they can at least hunker down in their well financed 30 year fixed rates.
With $600/month in taxes/insurance, the "don't spend more than 40% of your income on housing" rule means the necessary income to comfortably afford that property increases from $65k to $93k. That'll create some waves in the market.
It remains to be seen if now that the wave of remote workers is (probably) largely over now that employers are more likely to offer hybrid than fully remote work if these housing markets more severely correct compared to coastal cities (SF, LA, NYC) that have always been expensive.
Curiously, 20% down implies 5x leverage. Not saying that's what's causing the difference. But in the weird way leveraged finance works, a <100% income difference can absolutely fuel a 5x asset price gap.
I bought a house in 2009 @ 3.75% for 480k fixer-upper 1922 craftsman home in East Los Angeles area. My monthly payment was about $3200 because I could only afford ~4% down so we had to get PMI. At the time I made $110,000 and wife made $60,000. We put in about 50k into the house using my dad who is a general contractor (basically only paid for materials).
In Dec of 2021, we refinanced for 2.75% and our fixer-upper was valued at 750k which meant we could get rid of PMI and now our monthly payment is $2500 (including taxes). It's a massive drop for us now that we have a baby.
Literally none of this is possible right now. It feels like we've won the lottery. On top of that, we had a ton of help making this place a home because of my dad. For most families in the major metro areas, this is just totally out of reach now.
Same example, $65k salary x 3x to get a home value would be a $200k house. That's a total annual home cost of $11,750 with 2.75% interest rates and $16,200 with 6.5% rates.
If they can afford the $16,200 today based on the 3x rule, then surely they could have afforded a $285k house (4.4x gross) last year considering the monthly cost would be identical?
Pick a state though, say Missouri. A married couple earning $65k will bring home $50k after tax. In the first example, with a mortgage + tax + insurance house cost of $2,200/month, their home costs will be about $25k/year leaving them about $25k for other spending. Not lavish, but likely doable.
The real comparison though, is what they could rent an apartment for as the alternative to buying that house. In most places, they'd be paying nearly that same total in rent so it's basically a wash (assuming they can come up with the down payment).
it's rich to be rich.
In that scenario, the real winners will be people who waited to buy.
I guess cash-buyers will do better than financed buyers - but both of them are going to do terribly if prices decline substantially.
But yes the real winners are almost always those who have ample resources.
That's a home equity loan, not a cash-out refinance.
This assumes you'd anticipate rate cuts in the near-ish future. This property tax arbitration could easily go wrong.
* Similar problems with house prices going up
* If you default on a mortgage in the UK, you still owe the difference between what the bank are able to sell it for and your original loan.
* The period over which people have fixed interest rates is most commonly two years, and at that point, people have to remortgage, or go onto a “variable rate”. Many people will not be able to remortgage, so they’ll end up at the Bank of England’s interest rate plus an additional 3.5-4%.
Of the ARM mortgages, nearly 90% of them have longer terms than 1 year.
You're looking at maybe 2% of mortgages that will be impacted unless rates stay this high for >2 years.
Everywhere else in the world beside Denmark, where there are ONLY ARM mortgages - they're gonna be in for a world of hurt if interest rates stay this high for >2 years...
https://www.reuters.com/article/canada-banks-mortgage-rates-...
Bridge loans are less popular now, so you could get an ARM or interest only ARM on a new house and refinance later after selling your old house.
Combine this with the number of Bay Area potential buyers who are relatively insensitive to interest rates due to being able to make very large down payments, and of course the lack of new SFH construction relative to SFH demand... I don't think Bay Area SFH prices are actually going to drop much.
I'm more optimistic about affordability of denser housing. I'm unsure how many Americans are actually happy with that, though (which is part of why it's relatively affordable...).
The housing prices are delusional around here. Hopefully this will bring some sellers back down to reality.
We had stupid cheap money with low interest rates and an increased demand for space for lockdowns and WFH. Of course prices went way up. The prices weren't delusional; they reflected market realities.
no need to go that far out
the only similarity would be the 1 year aspect matching the sample size of 1 in that comic, but the driving forces are the quantitative tightening which are a greater sample size, and the velocity is important
there's better jokes
if mortgage rates want to stay 100% over Fed Funds rate, or 100% over 30yr treasuries, we'll have 8-9% by end of year, with many borrowers already being offered or experiencing 10%+ by then
Growing up my parents rate was 12% and in the early 80s rates got up to over 17% [0].
It is very possible for the era of cheap money to end across the board.
But current home prices don't need to drop. The average price needs to drop. That means more housing. Likely ends up meaning some drop or stagnation in current prices, but you don't need to shift down 40% to reach the goal.
Housing in my area is only a little above the 80s price after adjusting for inflation. Of course, the 80s price is nationwide average, while my given price is only the local average.
Why should it cost 6% to sell a house?
I'm wondering if Stamp Duty is just a UK thing. Here we pay a tax to the government when you buy that is based on the value of the house you are buying.
Up to £250,000 Zero
The next £675,000 (the portion from £250,001 to £925,000) -5%
The next £575,000 (the portion from £925,001 to £1.5 million) -10%
The remaining amount (the portion above £1.5 million) - 12%
The tax goes up even higher if you are buying a second home.
Edit: Based on [0] more common than I thought, though there is a really wide range in values with some of the rates quite small, e.g. 0.1%, even 0.01% in CO. This reference is 25 years old though.
The list of all of the rates for WA: https://dor.wa.gov/sites/default/files/2022-05/84%200013_Jul...
Stamp duty is paid when you buy something.
After you bought it, yes, you have to pay a yearly property tax in many places in the world.
The only loser here seems to be Redfin.
Perhaps not, but if you run the math you'll see a "few points" very quickly means you'll have to buy much less house than you may have desired.
I think we'll see desperate folks buying overpriced homes half the size that they could have afforded just months ago
The U.S. home market is worth ~50 trillion dollars. There are > 1.3 million homes for sale at this moment.
The answer to who is paying these crazy prices now is fewer and fewer people.